Pound-to-Euro Exchange Rate to Fall sub-1.10 says Investment Bank Strategist
- UBS say go "long" on the Euro against the British Pound
- Brexit yo-yoing and BoE reticence on interest rates will disappoint Sterling's bulls
- FIBO Group question recent defiant performance by Sterling, see downside
Image © kasto, Adobe Stock
The Euro is set to strengthen against the British Pound, say analysts at UBS Wealth Mnagement, who cite Brexit 'back and forth' and lack of upside traction in UK interest rates as the two main reasons for the Pound's under-performance.
UK economic activity is "not collapsing" say UBS but nor does it have the necessary gumption to make the Bank of England "trigger a hike in August".
The Euro, meanwhile, is likely to be kept buoyed by the European Central Bank's ability to manage market expectations on rates, leaving less scope for the "Euro to surprise to the downside".
The UBS report is cited by Eamonn Sheridan, in a note on the EUR/GBP pair carried by Liveforex.com.
UBS forecasts EUR/GBP rising to 0.91 in the coming months (from a current rate of 0.8827).
Traders are recommended to go long at 0.88 (already surpassed) and place a stop-loss at 0.8650.
In Pound-to-Euro exchange rate terms this translates to a target at 1.0992, with an entry to go short at 1.1360 and a stop loss at 1.1555.
The view that there is the potential for more downside in GBP/EUR is echoed by online broker FIBO Group, who in a recent note, questioned whether GBP should still be trading at its current elevated levels - above 1.30 versus the USD, for example - given the current climate of political uncertainty over Brexit.
"With all the uncertainty surrounding the UK at the moment such as political instability as well as the current Brexit negotiations that seem to be dragging on forever, many are starting to wonder just how is the British Pound holding up in the face of such problems," say FIBO group.
Their explanation for the Pound's resilience is that foreign exchange markets are expecting the Bank of England to raise interest rates in August.
Higher interest rates are considered supportive of currencies as they attract more inflows of foreign capital, drawn by the allure of higher returns.
"Expectations that the Bank of England will raise interest rates next month which is currently factored into the Pound and may be the reason it has managed to remain above $1.30," says the broker.
Therefore, any paring back of such expectations could materially damage Sterling.
The comments echo the bearish stance on the Pound proposed by Alberto Gallo, a portfolio manager at Algebris Investments, who argues that the Pound should be trading in the 1.20s versus USD, and the market was "miss-pricing" both the Pound and the Bank of England, meaning they would probably not hike rates in August, after all.
In Gallo's view the Bank of England might stay on hold until market uncertainty over Brexit had settled down, which argues for a much less bullish outlook for Sterling.
The Pound-to-Euro exchange rate has nevertheless shown it is largely resistant to any major directional moves, choosing to maintain a broad range between 1.13-1.15 over recent months.
Jeremy Boulton on the Thomson Reuters desk says the previous two periods of such consolidation lasted lasted 7/10 months and "both were followed by dramatic directional moves of circa 18% and 29%."
"Current consolidation may be close to its end," says Boulton who reckons either the September European Central Bank tapering of its quantitative easing programme or an August interest rate move at the Bank of England are possible "sparks for a breakout."
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